KPN position on ERG Consultation Document Bitstream Access (July 14th, 2003)
A.Introduction
1.In this paper KPN gives its views regarding the ERG Consultation Document Bitstream Access that was published on 14 July 2003. KPN shall first comment on some general issues that are of importance before turning to the specific questions which are put forward at the end of the Consultation Document.
B.Legal basis of bitstream access under 1998 framework not clear; new regulatory framework offers best starting point
2.Paragraph 2 of the ERG Consultation Document ("Regulatory issues") refers to both the existing legal framework and the new legal framework. To KPN it is unclear whether the ERG Consultation Document is based solely on the 1998 Regulatory Package[1] (and related Directives and Regulations), or prepared in anticipation of the implementation in all Member States of the new regulatory framework regarding electronic communication networks and services, the measures of which have been published in the Official Journal of the European Communities on 24 April 2002 and 31 July 2003[2]. KPN would like to recommend to the ERG to base any regulatory initiatives solely on the new regulatory framework.
3.The new regulatory framework was to be implemented in all Member States as of the 25th of July 2003 (with the exception of Directive 2002/58/EC on privacy and electronic communications). At this time, a number of Member States have indeed done so[3]. The NRAs of Member States which have not yet implemented the new regulatory framework in their national laws are as of 25 July 2003 obliged to interpret the national laws in line with the new regulatory framework, which entails that these NRAs cannot impose new obligations upon telecom operators which are not in accordance with the new regulatory framework. Given the foregoing, it would be counterproductive if the ERG were to apply the "old" Directives in the process of harmonizing bitstream access between Member States.
4.It can, moreover, be questioned whether the Directives and related measures of the 1998 Regulatory Package provide a proper legal basis for NRAs to regulate bitstream access. In KPN's opinion, such legal basis is lacking[4]. KPN notes that the ERG also has doubts on this issue where it states that Regulation 2887/2000 only relates to unbundled and shared access, and that one NRA questions the legal basis provided in the Voice Telephony Directive[5]. Such uncertainty does not offer a sound and sustainable basis for regulation, especially taking into account the fact that these Directives will soon be replaced by the new regulatory framework in all Member States. Furthermore, the legal necessity to review obligations based on the 98 Regulatory Framework in the context of the new regulatory framework limits the scope to use the old framework.
5.In light of the above, KPN urges the ERG to base its consultation document regarding bitstream access – and possible guidelines or a recommendation which may result from the consultation – on the new regulatory framework. This approach will secure a harmonised framework for regulation while giving the NRAs enough flexibility to regulate national or regional markets which are deemed not be effectively competitive.
C.ERG Consultation Document not in line with new regulatory framework
6.KPN disagrees with the ERG that the new regulatory framework in general explicitly favours a strong regulatory approach and that (quote)[6]: "the Recommendation on Relevant Product and Service Markets (…) foresees ex-ante regulation of bitstream access as part of the wholesale broadband access market (market no. 12) as a market to be regulated."
7.First of all, the new regulatory framework is based on the notion that sectorspecific ex-ante regulation is only mandated if the application of general competition law measures does not suffice to address the problem[7]. This notion of forebearance is also incorporated in the Recommendation on Relevant Product and Service Markets (the "Recommendation") where the insufficiency of competition law measures is one of the three cumulative criteria which must be met before ex-ante regulation can be used. Moreover, in the press conference d.d. 12 February 2003 which was held in Brussel alongside the publication of the Recommendation, Mr. Erkki Liikanen, Member of the European Commission and responsible for Enerprise and the Information Society, stated clearly that the aim of the new Regulatory framework is (quote)[8]: "(…) to remove regulation where possible and to allow the normal market forces to work freely" and (quote): "The message that we want to send to the market today (…) is our desire to begin the process of reducing regulation (…)".
8.Furthermore, the Recommendation does not oblige NRAs in general to regulate bitstream access as is stated in the ERG Consultation Document. The Recommendation does not automatically foresee ex-ante regulation of bitstream access as part of the wholesale broadband access market as a market to be regulated. The need for ex ante regulation of the wholesale market for broadband access requires to be demonstrated by the NRA through a thorough market analysis which establishes that the market in question is not effectively competitive. In this context, ex-ante regulation of the wholesale broadband access market is only foreseen if the related downstream retail market for broadband access is not effectively competitive. This is based on the basic notion under the new framework that regulation of wholesale markets is only deemed necessary if the related downstream retail markets are not effectively competitive. This approach is based on the principles of European competition law and made explicit in the Recommendation on Relevant Product and Service Markets where it is stated that (quote)[9]: "The starting point for the definition and identification of markets is a characterisation of retail markets over a given time horizon, taking into account demand-side and supply-side substitutability. Having characterised and defined retail markets which are markets involving the supply and demand of end users, it is then appropriate to identify relevant wholesale markets which are markets involving the demand and supply of products to a third party wishing to supply end users."
9.In the Netherlands, for instance, both the wholesale market and the retail market for broadband access can be considered to be effectively competitive. Such is the conclusion of an investigation conducted by Consultancy Agency Stratix at the request of OPTA. This state of affairs in the Netherlands is due to the relative high penetration of cable operators who also are capable to offer wholesale and retail broadband access[10]. Also other DSL operators (Versatel, Bbned, Tiscali) are actively selling wholesale broadband access. Each of them is currently building out their own geographical footprints including their own DSLAMs. This has resulted in a geographical coverage of broadband access of about 280%[11]. A geographical coverage which is differentiated between high density suburban areas and more rural areas within the Netherlands. This does not mean that rural areas are deprived of broadband access. Consultancy Agency Stratix (referred to earlier in this paper) concluded that WiFi is already being used as complementary product in relation to fixed broadband infrastructure in rural areas[12]. Based on this outcome there is no basis for imposing any ex ante obligations in respect of bitstream access.
10.KPN is astonished to note that the ERG Consultation Document lacks any analysis of the interaction between the retail market and the wholesale market for broadband access, as well as a thorough analysis of the impact of regulated bitstream access on the upstream market for unbundled local loop (ULL). The latter is of importance, because the introduction of regulated bitstream access can severely and negatively impact the business models of operators which already use unbundled local loop access for having build and still rolling out further their own broadband networks. These market parties include Versatel, Bbned and Tiscali like stated in the previous paragraph. This would mean that regulation of bitstream acess by OPTA might improve the business case of some new entrants, but worsen the business cases of facility based existing DSL operators and new entrants. This is not efficient regulation and will not lead to sustainable competition. The ERG Consultation Document, however, does not address such ambiguous effects of regulating bitstream access.
11.The ERG Consultation Document also conflicts with the aim of arriving at technologically neutral regulation, as is provided under the new regulatory framework. This principle is one of the cornerstones of the new regulatory framework and entails that NRAs are not permitted to discriminate in favour of the use of a particular type of technology[13]. The ERG negates this principle in its Consultation Document by defining bitstream access as the corresponding wholesale product for DSL services (high speed services), thereby dismissing beforehand the high speed service capabilities offered by other infrastructures (e.g. cable) which are equivalent to bitstream access. To KPN it is disappointing that – even before the new regulatory framework is properly implemented – the ERG breaks with the principle of technological neutrality.
D. Bitstream Access not limited to DSL
12.KPN strongly objects against the fact that the ERG Consultation Document apparently is founded on the assumption that bitstream access requires ex ante regulation. The validity of this statement is not supported by any fundamental analysis, and would – in respect of certain Member States - even appear to result from incorrect assumptions or insufficient fact-gathering. In the following, KPN will motivate the reasoning behind its objection.
13.In the Consultation Document it is stated that the main objective of Regulation 2887/2000 regarding unbundled and shared access to the local loop is being reached only in an unexpectedly slow way[14]. The ERG refers to this limited progression as an argument to favour other types of wholesale products for competitors. However, from the COCOM document COCOM03-03REV1 (Tables for collection of data on local broadband access) it can be concluded that on January 2003 new entrants already captured 39% of the total retail market for broadband access in all Member States together. In The Netherlands this percentage is even higher - 74% - due to the high cable penetration. This means that – based on the current regulation – new entrants are perfectly capable of gaining (or even already have gained) a considerable market position in the retail market for broadband access. In view of the above, the (in)effectiveness of Regulation 2887/2000 does not provide grounds to increase the burden of regulation in The Netherlands.
14.The new regulatory framework requires NRAs to include within the determination of the relevant wholesale market for broadband access all infrastructures which are capable of enabling braodband access services equivalent to bitstream access.
15.Such a broad deliniation is in line with the Recommendation in which is stated that the market of wholesale broadband access (quote)[15]: "(…) covers 'bit-stream' access that permits the transmission of broadband data in both directions and other wholesale access provided over other infrastructures, if and when they offer facilities equivalent to bit-stream access." In the Explanatory Memorandum which accompagnies the Recommendation it is stated that (quote)[16]:"At the wholesale level, broadband access services include what is traditionally referred to as bitstream services. For now the wholesale broadband access market is limited to bitstream services but defining the market in this way allows NRAs to take account of alternative infrastructures when and if they offer facilities equivalent to bitstream services." The Explanatory Memorandum also states that (quote)[17]: "At the current time, upgraded cable systems are not sufficiently widely developed or deployed although the situation might change in some parts of the Community over the time frame of the current Recommendation." As regards the foregoing, it may be noted that the Recommendation states that the need to update the Recommendation will be reviewed no later than 30 June 2004.
16.As regards The Netherlands and several other Member States such as Germany, the United Kingdom, Austria and Belgium, this entails that cable networks have to be taken into account when defining and analyzing the market for wholesale broadband access. In The Netherlands, a number of cable operators in fact already offer bitstream access to their subsidiairies. The role of cable operators within the European Union in the context of broadband access is also highlighted in the previously referenced COCOM document COCOM03-03REV1 which deals with "Tables for collection of data on local broadband access". Based on the table concerning the provision of broadband Internet access services by incumbents and new entrants as per January 2003, the document concludes that already 30% of broadband Internet access is being offered by other means than the fixed telephony (PSTN) network within all Member States together. In The Netherlands this percentage is much higher (66%) due to the high cable penetration, which reinforces the grounds for taking cable systems into account when analyzing the wholesale broadband access market. Cable operators, nor, for that matter, this COCOM document, are referred to in the ERG Consultation Document, which in KPN's opinion is a major oversight.
17.Besides cable networks, other infrastructures which are now, or will in the near future be, capable of offering broadband access, should also be incorporated in the analyses of the retail and wholesale markets for broadband access. For instance: Wireless Local Loop, WiFi, powerline communications (PLC), satellite communication etc. At this time some of these infrastructures can also be considered as possible alternatives for the PSTN. In The Netherlands WLL frequencies will be auctioned at the end of this year. One may also note the hearing soon to be held at the initiative of the European Commission, relating to the possibility to use powerlines for broadband communications as an alternative to the PSTN and cable networks[18].
18.To conclude, for KPN the main point of concern towards the ERG Consultation Document on Bitstream Access is the fact that, first of all, in defining bitstream access as wholesale product for DSL services, ERG a priori excludes other infrastructures which already offer or can – now or in the near future - offer bitstream access and secondly, that it does not thoroughly investigate or analyse the necessity of regulating bitstream access. Thus, the ERG completely ignores the procedural steps which have to be taken by NRAs under the new regulatory framework to determine whether access regulation is necessary. These steps comprise: market definition, analysis of market (i.e is it effectively competitive) and, if the market is found not to be effectively competitive, the imposition of proportionate remedies.
19.This major shortcoming in the Consultation Document is strikingly highlighted by the last paragraph, where it is stated that (quote)[19]: "Regarding price regulation, it is important that the NRA ensures a consistent price structure of all regulated access products (….)." This implicates that only the most severe remedy, i.e. price regulation, is deemed to be a proportionate remedy. Other remedies (such as a non-discrimation obligation) are not even mentioned, let alone analysed. Such a statement is not based on any market analyses by NRAs and is therefore not in line with the principles of the new regulatory framework in which NRAs can only impose remedies after a proper market analysis. It may very well be that individual NRAs conclude that remedies are not necessary considering the effectiveness of competition in the national/regional broadband markets concerned, or that, in absence of effective competition, less imposing remedies than price regulation will suffice.
E.Consultation Document not in line with economic theory and practice of European competition law
20.One of the arguments which the ERG puts forward as grounds to regulate bitstream access is the need to repair the business case of new entrants. Such is stated in the Consultation Document as follows (quote)[20]: "Bitstream access may be called a low-cost option as less investment is required, but new entrants can nevertheless use their networks (without having to roll-out to the MDFs as is the case for unbundled access).(..) This has to be kept in mind as bitstream access might be the more appropriate access product in times of dry capital markets. The change of the financial market climate makes funding for new operators much more difficult."
21.KPN is of the opinion that the reparation of business cases of new entrants - with very little gain to end users - is not the responsibility of NRAs and may even be considered state aid or business stealing[21]. Neither the existing nor the new regulatory framework provides a legal basis for such entry assistance. NRAs are bound to the principles of forbearance to create a level playing field. It is not the responsibility - nor legal duty - to support specific telecom operators.